Assessment of domestic photovoltaic systems based on real options theory

Abstract

In the last decade, the financial attractiveness of photovoltaic (PV) systems has been increasing due to the rapid and constant improvements of PV technologies and the introduction of renewable energy support mechanisms. Under these circumstances, residential electricity consumers can benefit from investments in domestic PV systems. Investment decisions in PV systems can be assessed with well-known discounted cash flows criteria such as the cost of energy and the net present value. These types of analyses either recommend abandoning the project or investing immediately. However, due to fast improvements in PV technologies, especially in the last few years, options to postpone investments in PV systems can be valuable. These options can be assessed with real options theory. This paper proposes a real options methodology for the assessment of domestic PV systems, considering the expected evolution of PV technologies and the option to delay investment. The methodology employs a normalization technique to illustrate, in a simple and intuitive manner, the convenience of the delay option. Two case studies based on real aggregated data for the UK are presented. The first case study illustrates the methodology, whereas the second is an extensive study meant to provide insights about investments in domestic PV systems in the UK. The results indicate the circumstances that drive and disincentivize investments in different PV technologies. Additionally, it is shown that the option to delay investment is a potential driver for investments in emerging organic-based PV technologies. Copyright © 2012 John Wiley & Sons, Ltd.